Lexpert US Guides

30 | LEXPERT • June 2019 | www.lexpert.ca/usguide equity — even though it's debt. ey'll do a hybrid between the traditional loan and typical private-equity investments. If you just want debt capital there's a whole myriad of ways they invest in companies which is very different from the tradi- tional bank loan." Publicly traded US buyers who aren't getting terms that they like from Canadian lenders are going around them in ways that are more difficult for private- equity firms, Mayr says. "Public companies have access to US public debt markets and can access public debt faster and easier than access- ing traditional private of bank debt here in Canada. What would really drive the decision is the pricing, and the public debt markets in Canada certainly aren't as liquid or deep as in the US." But he too warns there are poten- tial risks going forward to bypassing Canadian lenders on a purchase if the acquisition is going to remain in Canada, even as a subsidiary. "If I raise debt at the US parent level for the acquisition, struc- turing the debt efficiently operationally so it actually works from an operational and a tax point of view going forward can be more difficult to do by accessing a facil- ity that's outside of Canada. You typically need both." Darcy Moch, co-chair of the tax group at Bennett Jones LLP in Calgary, says Canada used to practically force US buyers to use US banks by charging foreign banks Canadian withholding tax on interest payments. But the government realized Canada's Big Six chartered banks didn't have the financial capacity to loan as much money as was required, so in 2007 the government announced it was changing the policy to do away with withholding tax on interest payments to arm's-length foreign lenders. "ere have been a number of produc- tive changes to allow for inbound investment in Canada to be more effec- tive. is change to withholding tax has absolutely freed up the ability to put more debt into Canada for foreign corporate acquisitions." national bank. "Whenever you get into credit in a rationed market rates are high. But for a long time the marijuana producers couldn't borrow anything at all, so for them anything below 35 percent for them is cheap." One group that is staying away from Canadian banks is Chinese buyers, he says. e arrest of Huawei Technologies Co. Ltd. CFO Meng Wanzhou in Decem- ber 2018 at the request of the US, which planned to extradite her, put a screech- ing halt to Canadian purchases. While Chinese entities generally did their own acquisition financing, the day-to-day operations of what became Canadian subsidiaries would have presumably been done through Canadian banks, which have seen that lending work dry up. "Transactions from China are dead," Gropper says. "It's not just quiet. ey've gone away." But other sectors are hopping and US buyers – especially freshly financed private-equity funds attracted by the low Canadian dollar and quality of young companies – are stepping in and keeping lenders busy. Clemens Mayr, a corporate finance partner in the Montréal office of McCar- thy Tétrault LLP, says technology is especially hot. "Anything having to with artificial intelligence, payment systems, fintech generally. at's an area where there's a lot of activity and interest." Mining plays, industrials, mid-stream oil and gas assets that provide a steady yield, and even strategic companies in fields where a PE fund can leverage the acquisition by expanding geographical reach or market share of another, similar, acquisition are also hot commodities — and they all require financing. Mayr says there are a couple of things US buyers coming into Canada need to know about the Canadian debt market. "If you look at private debt in Canada, what's particular, and very different from the US, for example, is our banking system is quite unique. It's surprising but US and other foreign buyers don't always know this: we have five or six very large banks and that's it. So the commercial lending space is really occupied by a small number of large players. "is can sometimes lead to challenges. If you're really trying to get a competitive process going to raise private debt and price it, you can run into the issue that every- body's putting the same terms on the table because of the limited sources of capital more quickly than in other jurisdictions." But banks aren't the only ones offering private financing, he notes. "It's important not to underestimate the pension funds, which again is something unique to Canada," he says. "e OMERS [Ontario Municipal Employees Retire- ment System] and Teachers [Ontario Teachers' Pension Plan Board] and the Caisses [Caisse de dépôt et placement du Québec] are really unique in having become significant direct investors — both in the private-equity funds but also in the debt markets. "ey are important players in the ecosystem of the debt market in Canada, so it's important to develop those relation- ships, and reach out to them. If you really want to get a process going where you competitively price a financing, you need to put these guys in the mix as well." e cost of capital for pension funds and life insurance companies is quite different from the banks, Mayr says, so they can price deals differently — although gener- ally they take a longer-term view of assets they invest in. "You can get them to do less traditional instruments such as debentures, quasi- Financing "The Canadian market has traditionally been a bit more conservative than the American market but with so much activity, those expectations, those differences, have significantly narrowed." Carol Pennycook, a partner at Davies Ward Phillips and Vineberg LLP in Toronto.

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